The Rise of Passive Investing in Today's Market (2024)

FAQs

Why is passive investing becoming more popular? ›

The rise of passive investing in today's market is because of their low-cost returns. Such returns mirror benchmark indices. Passive ETFs and index funds often outperform the majority of active fund managers (as per the SPIVA India Scorecard). This makes them a low-effort way to invest.

At the same time, the study says the investor passive obsession has opened up new opportunities for active managers in strategies such as index arbitrage and deep value. “The reality, then, is not so much that the rise of passive investing ruins markets, but only that it changes them,” the paper says.

Passive investments in financial assets refer to investments that are made for the purpose of earning a return on the investment until cash is needed at a future date.

The inexorable trend to passive investing creates numerous issues for fund management, including fee and revenue pressure, which forces traditional managers to seek new revenue streams, such as illiquid and private assets, which also implies increased portfolio risk.

“Active” Advantages

Among the benefits they see: Flexibility – because active managers, unlike passive ones, are not required to hold specific stocks or bonds. Hedging – the ability to use short sales, put options, and other strategies to insure against losses.

The biggest concerns are focused in two areas: (1) Passive investing drives up market valuation and potentially creates a bubble; (2) Passive investing ignores the fundamentals of each individual stock, thus hurts the price discovery and creates dysfunctional financial markets.

Because active investing is generally more expensive (you need to pay research analysts and portfolio managers, as well as additional costs due to more frequent trading), many active managers fail to beat the index after accounting for expenses—consequently, passive investing has often outperformed active because of ...

Investment funds that seek to track an index or other benchmark are typical examples of a passive investment. These can include mutual funds and exchange traded funds (ETFs). Passive investment funds typically have an investment objective that seeks to mimic market returns over the long term.

What of the market is passive investing? ›

Over half (53 per cent) of the market today is owned by passive index funds. You read that right – there is more money in passive index fund investments than in actively managed accounts.

A passive investor rarely buys individual investments, preferring to hold an investment over a long period or purchase shares of a mutual or exchange-traded fund. These investors tend to rely on fund managers to ensure the investments held in the funds are performing and expect them to replace declining holdings.

In the interview with Bloomberg, Einhorn declares that passive investing has fundamentally broken markets. And that the changes wrought from passive investing have meant he's had to change his method of value investing to stay in business. His claim that passive investing is distorting markets isn't new.

DISADVANTAGES OF PASSIVE INVESTING

Limitations to outperforming the market or take advantage of short-term opportunities. Unable to deviate from the performance of the underlying index or benchmark. Limited ability to invest in specific companies or sectors of interest.

Passive investing doesn't attempt to predict which investments will outperform the average. It aims to capture the long-term appreciation of the market while reducing costs and minimizing the additional risk associated with investing in individual stocks or specific market sectors.

Unlike active income, which requires continuous time and effort to generate, this type of income will generate on its own, which allows you to focus on other areas of your business rather than being tied down by day-to-day tasks. You can quite literally make money while you sleep.

Investors cited that their growing interest in sustainable investing is due to factors including new climate science findings (53%) and the financial performance of sustainable investments (52%). A majority of investors also believe that companies should address environmental and social issues.

Why have passive portfolio management strategies increased in use over time? Passive portfolio management strategies have grown in popularity because investors are recognizing that the stock market is fairly efficient and that the costs of an actively managed portfolio are substantial.